Utility stocks are considered to be the ultimate “widow-and-orphan” stocks – companies that present extremely low risk, and also throw off significant income to produce dependable returns.
Of course they are. Utilities operate in what are essentially monopolies, delivering electricity, gas and water to various municipalities without hardly ever having to deal with competition. Granted, because they’re regulated, utility stocks don’t offer much in the way of growth. Utilities are regulated, so they can only increase their prices by certain amounts every so often.
But what they do provide is extremely predictable revenues and earnings, much of which is delivered to shareholders in the form of dividends.
Utility companies are not exciting, they’re hardly new, but they remain among the most popular ways to get safe, secure income.
While you can go out and, say, buy this electric utility and that gas provider, there’s another option. Since investors typically play utility stocks for safety anyways, why not maximize that strategy by adding the intra-sector and geographic diversification offered by exchange-traded funds (ETFs)? With ETFs, you can hold dozens of utilities for a low fee, and not have to worry about an operational flub in one holding wrecking your portfolio.
To get you started, here’s a look at a few ETFs that invest in utility stocks — from straightforward to slightly twisted.
Utilities Select Sector SPDR Fund (XLU)
Expenses: 0.14%, or $14 annually on every $10,000 invested
State Street Global Advisors’ Utilities Select Sector SPDR Fund (NYSEARCA:XLU) is the biggest, most liquid way to buy a basket of utility stocks. The fund provides investors with exposure to 30 utility companies spanning electric (62.2%) and multiple utilities (33.4%), as well as a little weight in water and independent power/renewable electricity producers.
The fund is far from perfect – it’s extremely “top-heavy,” which means a couple of stocks account for an outsize portion of the ETF’s performance. Specifically, top holdings NextEra Energy Inc (NYSE:NEE) and Duke Energy Corp (NYSE:DUK) alone make up 9.3% and 8.2% of the fund, respectively.
Still, you don’t have to sweat overweights too much in a utility fund, given the much more stable and secure nature of utility stocks. And the exposure comes at a dirt-cheap 14 basis points, which barely eats into the 3.3% dividend yield thrown off by the XLU.
Guggenheim S&P 500 Equal Weight (RYU)
Of course, the point of investing in an ETF for diversification in the first place is to ensure that you’re not overweight in any one or two stocks. To that end, the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RYU) might be a better way for you to invest in the utility sector.
The RYU is similar to XLU in its number of holdings, at 32 as of this writing. However, it has a number of important differences.
First, and most important, has to do with the name. Whereas XLU is a market cap-weighted fund that invests on stocks based on the size of their market capitalization (bigger companies make up a bigger part of the fund), RYU has an “equal weight” methodology that, at every rebalance, starts all stocks at the exact same weight. Obviously, in between rebalancings, stocks gain and lose value, so weights aren’t always even. But as of right now, the top three holdings — CenturyLink Inc (NYSE:CTL), Level 3 Communications, Inc. (NASDAQ:LVLT) and NRG Energy Inc (NYSE:NRG) — are each weighted at 3.26%, 3.19% and 3.19%, respectively.
That brings me to the second big difference between XLU and RYU: Guggenheim’s fund considers telecoms to be a utility, which in a way, they’re fairly similar in that telecommunications have become a basic necessity, and they operate against very few competitors. So RYU’s breakdown is roughly 44% electric utilities, 34% multi-utilities, 12% telecom, and the rest spread between water and independent power/renewable electricity companies.
As a note, RYU yields slight less (3.1%) and charges more in expenses.
iShares Global Utilities ETF (JXI)
Expense Ratio: 0.47%
One last way to add even more diversification to your portfolio is to pull the lever on geography, taking your utilities exposure from U.S. to global. As the name implies, that’s what the iShares Global Utilities ETF (NYSEARCA:JXI) supplies.
But a quick note before delving into the fund: When it comes to ETF names, providers use two different terms to indicate two different things. If you see the word “International,” it typically means countries excluding the U.S. However, “global” typically implies that the fund holds both U.S. and international stocks.
And that’s the case with JXI, which actually holds U.S. utility stocks to the tune of nearly 60%. However, it also peppers in utility companies from a number of developed markets, including the United Kingdom (9%), Spain (5.6%) and Hong Kong (4.3%). While the fund isn’t equally weighted, it’s not nearly as top-heavy as the XLU, with top holdings NEE, DUK and U.K.’s National Grid plc (ADR) (NYSE:NGG) coming in at 5.4%, 5.2% and 4.6% weights, respectively. Weightings are similar, too, with 59% electric, 32% multi, and small single-digit weights spread among gas, water and independent power producers.
JXI is understandably the most expensive of this trio at 0.47% in fees, but also boasts the largest yield, at roughly 4.3%.